After leaving official interest rates on hold for 12 months, last Tuesday the RBA bit the bullet and slashed interest rates, sending the Australian dollar down over 5% to below 74 US cents.
History shows that individual rate cuts are a rarity so there is a high chance another cut will see the dollar dive even further. In essence a falling Australian dollar translates into more expensive overseas travel. Therefore in theory demand for overseas travel should subsequently decline. If this occurs Flight Centre’s recent guidance of 4%-8% growth in PBT may prove overly optimistic.
While Flight centre’s CEO Graham Turner concedes a falling Australian dollar does have some impact, in his experience Australians continue to travel, but cut back on spending in their foreign destination. A quick review of rising air traffic numbers from Sydney Airport Holdings Ltd (ASX:SYD) lends weight to the CEO’s claims.
Personally while I believe a falling dollar will have an impact, the greater concern for investors should be the recent federal budget and this weekend’s announcement made by Prime Minister Malcolm Turnbull of the upcoming federal election set down for July 2.
No matter which side wins, elections themselves are well known for killing off consumer and business confidence. With the lack of certainty surrounding government policy, individuals and businesses hold off capital expenditure until after the election. This year’s election is of particular concern, because the campaign will be one of the longest in recent memory so will impact a greater portion of Flight Centre’s second-half earnings period.
Shrewd investors will be watching for any leads from consumer confidence surveys due out this week from both Westpac Banking Corp (ASX:WBC) and Australia and New Zealand Banking Group (ASX:ANZ). The May surveys will capture initial reactions to the Federal Budget and the RBA’s rate cut.
While consumer confidence ebbs and flows with monotonous regularity, we as investors must look for great companies that can not only survive varying macro conditions, but businesses which can adapt and thrive in constant change. Flight Centre is one such company. Despite many experts predicating its demise with the rise of the internet, Flight Centre’s “clicks and bricks” approach to business has continued to confound its critics. Long term investors should view current events as an opportunity to pick up a great Australian company at a great price, I know I am.